Pro forma income statement Euro Designs Inc. expects sales during 2013 to rise from the 2012 level

QUESTION

Pro forma income statement Euro Designs, Inc., expects sales during 2013 to rise from the 2012 level of $3.5 million to $3.9 million. Because of a scheduled large loan payment, the interest expense in 2013 is expected to drop to $325,000. The firm plans to increase its cash dividend payments during 2013 to $320,000. The companys year-end 2012 income statement follows.Euro Designs, Inc. Income Statement for theYear Ended December 31, 2012Sales revenue$3,500,000Less: Cost of goods sold1,925,000Gross profits$1,575,000Less: Operating expenses420,000Operating profits$1,155,000Less: Interest expense400,000Net profits before taxes$ 755,000Less: Taxes (rate=40%)302,000Net profits after taxes$ 453,000Less: Cash dividends250,000To retained earnings$ 203,000a. Use the percent-of-sales method to prepare a 2013 pro forma income statement for Euro Designs, Inc.b. Explain why the statement may underestimate the companys actual 2013 pro forma income.
Answer A Sales revenue $ 3,900,000 Less: Cost of goods sold $ 2,145,000 Gross profits $ 1,755,000 Less: Operating expenses $ 468,000 Operating profits $ 1,287,000 Less: Interest expense $ 325,000 Net profits before taxes $ 962,000 Less: Taxes (rate $ 384,800 Net profits after taxes $ 577,200 Less: Cash dividends $ 320,000 To retained earnings $ 257,200 Percent of Sales Cost of Goods Sold $ 1,925,000 Sales revenue $ 3,500,000 Percent of Sales 55% (Cost of Goods Sold/Sales Revenue *100) Operating Expenses $420,000 Sales revenue $3,500,000 Percent

of Sales 12% (Operating Expenses/Sales Revenue * 100) Answer B The Cost of goods sold and operating expenses are calculated on the basis of last years performance. The current year levels may have changed/decreased/increased, but the calculations have been done on previous year levels,so, the companys actual 2013 performance may have been underestimated.

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